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How Canada's economy stumbled

The Globe and Mail

These are stories Report on Business is following Friday, Nov. 30, 2012.

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Recovery slows
Canada's economy stalled in the summer, expanding at an annual pace of just 0.6 per cent, well down from the second quarter.

Today’s soft report from Statistics Canada was below the already weak forecasts among economists, who had expected annualized growth of between 0.7 per cent and 1 per cent.

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On a month over month basis, growth was flat in September alone. The quarterly reading compares to an annual pace of 1.7 per cent, which was revised down by Statistics Canada today from its earlier measure of 1.9 per cent.

Among the culprits in the quarter were exports, which fell 2 per cent in the quarter amid soft demand in the United States and a strong dollar, declining business investment and residential investment, driving home that the housing market is cooling. On an annualized basis, exports of goods and services plunged 7.8 per cent.

Notable is that the drop in exports was the fastest since the second quarter of 2009, while consumer spending was at its fastest so far this year, climbing 0.9 per cent.

Goods production slipped 0.6 per cent, more than offsetting the 0.4-per-cent rise in services.

Some of the factors behind the third-quarter slump are believed to have been temporary, which suggests a bit of a pickup as the year winds down. But high unemployment, record consumer debt levels and the sinking real estate market will temper that.

"The headwinds that hit Canada in the third quarter are not going away just yet," said senior economist Krishen Rangasamy of National Bank Financial.

"The global economy is still in a funk (based on the PMI readings worldwide), a clear negative for our exporters, while domestic demand could be restrained by a weakening housing sector, and tepid investment from both the private sector and government (more so with the latter's aim to balance the budget sooner rather than later)," he said in a research note.

"Consumption spending which regained some vigour in Q3, should soften again as Canadians face challenges brought by a softer labour market, a mounting debt load, and less favourable housing wealth effects. "

Canada’s weak showing in the quarter compares to the annual pace of 2.7 per cent in the United States, though economists expect that to slow, possibly to a rate below 2 per cent.

In the key energy sector, output declined by 1.4 per cent, while mining and the support groups for both industries also fell.

“Mining excluding oil and gas extraction (-2.8 per cent) was also down in the third quarter, as production declines at potash and at copper, nickel, lead and zinc mines offset increases in coal mining,” Statistics Canada said.

The Statistics Canada report also put some over all numbers behind the softening in the real estate market.

"Business investment in housing fell 0.9 per cent in the third quarter, after a 0.1-per-cent decline in the previous quarter," the federal agency said.

"This decrease was the result of a 10.7-per-cent decline in ownership transfer costs as housing resale activity slowed considerably. In contrast, renovation activity increased 0.9 per cent, recovering from the 1.3-per-cent decline in the second quarter. New housing construction increased 1.6 per cent, half the pace of the average 3.2-per-cent growth over the previous five quarters."

While economists expect something of a rebound in the fourth quarter, it's not expected to be stellar.

"The weakening was not unexpected in the wake of the earlier-released August GDP report that showed activity dropped (a non-annualized) 0.1 per cent in the month with much of the weakening in August attributed to temporary factors," assistant chief economist Paul Ferley said of the third-quarter reading.

"The September GDP report, also out this morning, provided little indication of any reversal in that month though we are assuming evidence of such to emerge in the fourth quarter. This should contribute to Q4 growth rebounding though to a still modest rate of less than 2 per cent."

Euro zone jobless rate at a fresh high
Unemployment in Europe continues to inch ever higher amid the raging debt crisis and crippling recessions in some countries.

The jobless rate in the 17-member euro zone climbed in October to 11.7 per cent from 11.6 per cent a month earlier, with almost 19 million people out of work. In the wider, 27-member European Union, unemployment rose to 10.7 per cent, also up a notch, with an estimated 26 million people struggling to find jobs, according to the Eurostat agency today.

Unemployment among young people also worsened, hitting 23.9 per cent in the euro zone and 23.4 per cent in the EU.

As always, the differences among European economies was stark, highlighting how the periphery is suffering, in particular.

The highest rates of unemployment were again in Spain and Greece, at 26.2 per cent and 25.4 per cent, respectively, though the latter is an August reading. The lowest were in Austria, Luxembourg and Germany, at 4.3 per cent, 5.1 per cent and 5.4 per cent.

"This rising unemployment rate is likely to further weigh on the collective economies across Europe and further keep the pressure on bank balance sheets," CMC's Mr. Hewson said before the numbers were released.

"We’ve already seen this week that Spanish banks will have to shed over 6,000 jobs putting further upwards pressure on the rate in that country, as well as further pressure on the non-performing loan rate."

Today's numbers came as German politicians voted to approve the latest tranche in Greece's bailout funds, though many of Chancellor Angela Merkel's members did not support her.

Japan’s crossroads
The iPhone is giving Japan a boost, though it’s still an economy deep in trouble and uncertainty.

At the same time, the government, heading into a mid-December election, unveiled a stimulus plan worth some ¥880-billion – that’s about $11-billion (U.S.) – it says will give a mild spark to the economy.

Government statistics released today showed industrial production rising in October, with a surprising gain of 1.8 per cent, though over all production is still well down from a year ago.

Japan is also still grappling with deflation, with the government reporting another drop in consumer prices.

 “In Japan, industrial production unexpectedly rose 1.8 per cent in October after slumping 4.1 per cent in the prior month, reportedly driven by orders for Apple’s iPhone,” said Robert Kavcic of BMO Nesbitt Burns.

“Production was still down 4.3 per cent year-over-year as the economy grapples with recession in Europe and slower growth in China,” he said in a research note.

“Deflation remained firmly entrenched in the month, with over all consumer prices falling 0.4 per cent year-over-year, as expected, and prices excluding food and energy down 0.5 per cent year-over-year.”

All in all, Japan's economy looked a little better in October, but it's no surprise that it's front and centre in the election campaign, with pressure on the Bank of Japan to do more.

"Japan’s economy looks to have rebounded somewhat in October with retail sales numbers released yesterday showing some improvement (+0.7 per cent month-over-month), industrial production today posting a strong gain (and an unexpected one at +1.8 per cent month-over-month vs. expectations for a -2 per cent contraction), and housing starts up," said Derek Holt and Dov Zigler of Bank of Nova Scotia.

"While much of this is simply rallying off of a low base (especially in the case of both retail sales and industrial production, both of which are still down substantially in year-on-year terms), at least the bleeding stopped for a month in October," they added.

India growth slows
Economic growth in India continues to slow, slipped to 5.3 per cent in the country’s July-September second quarter.

That’s the slowest pace in about three years.

Today’s data, released by the Central Statistics Office, highlighting the push in the country – the ‘I’ in BRICS – for new measures.

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